The End of Social Democracy

The current Eurozone crisis may end up as a defining moment in post-War European, and indeed American, history. Most of my leftist friends regarded the financial crisis of 2008 as a “market failure” that vindicated their views about the evils of capitalism. The debt crisis in Europe offers no such consolations to modern liberals, who may now be facing their Waterloo.

That’s because it is very hard to ignore that the Eurozone crisis concerns sovereign debt. Greek bonds have become toxic because of decades of political decisions. Spanish, Portuguese, and Italian bonds may go the same way, and for the same reasons. It is important, therefore, to understand these political decisions, for they have not only created problems in Europe but also here in the United States as well. They can be summed up with a single term: social democracy. Thus at the end of this decade we may find ourselves looking back and summing it up with a single phrase: the end of social democracy.

After the traumas on the Great Depression and World War II, the great imperative in the West was stability. This was perhaps clearest in Italy and Germany, the former Axis countries where, with strong encouragement from the victorious Americans, leaders emerged who were committed to brokering a new social contract that combined the openness of free market capitalism with the encompassing and egalitarian concern for social welfare that made socialism attractive to many.

Fans of Ayn Rand and Friedrich Hayek will certainly decry this system, but I find myself marveling at its achievements. Social democracy’s most important accomplishment was that it made ordinary workers indifferent to the appeals of communist organizers by spreading the wealth of modern industrial society.

Social democracy was and remains organized around the singular goal of creating and sustaining a large and satisfied middle class. This paid dividends when the threat was Soviet dominated communism, but even then there was a management fee, as it were.

Markets provide crucial information. An open employment market would give me accurate information about job opportunities and compensation, allowing me to make choices accordingly. Social democracy has always muted these market signals, using regulations, subsidies, and taxation as it must in order to create the conditions for a large middle class.

Stability is also threatened by the ups and downs of the business cycle. Modern governments organized along the lines of a social democracy adopted large-scale economic policies to meet this threat. The first were Keynesian strategies of stimulus spending to mute these cyclical extremes. Then after the groundbreaking work of Milton Friedman monetary strategies were added to the tool kit and are now used to achieve much the same goal.

Economists argue back and forth about the merits of these macroeconomic strategies, and I don’t have enough expertise to even have an opinion. But one aspect is clear. Both Keynesian and monetary policies have effects similar to regulation, subsidy, and taxation. They mute and distort market signals. For example, the market says that ten year Treasury notes are worth buying if they pay 3 percent interest. Once the Fed gets done injecting billions and billions of dollars into the financial system, the market buys them if they pay 2 percent.

Many commentators have pointed out that exactly these distorted market signals led many Americans to over-invest in the housing market, pushing up prices and creating the bubble that eventually burst. What goes unnoticed is the far greater and far more important effects of this distortion, which as I’ve argued in intrinsic to social democracy.

How important is it for me to work? How much? How long? Where should I live? What kind of training should I seek? Should I get married and have children? It is absurd to imagine that markets signals dictate our answers to these questions. But it is equally absurd to imagine that market signals are irrelevant. And this is at the root of the crisis we face today. The simple fact is that the goal of social democracy”stability in and through policies designed to create and protect middle class life”has for a long time insulated most citizens in Western nations from economic reality.

The most obvious example is globalization. New York is full of very wealthy men and women who work in finance, media, and other new economy jobs. They are exquisitely sensitive to the opportunities presented by globalization. Dearborn, Michigan? Youngstown, Ohio? Decades of policies that are too multifaceted and interlocking to admit of analysis much less summary have been deployed by well-meaning politicians and economic experts to protect them from exactly the market signals that make hedge fund managers rich.

I could give countless other examples, and they point to the same conclusion. The success of social democracy”it really has secured a high degree of social stability organized around middle class life”comes at a price that we are about to pay. After decades of protection the vital center of social democracy is now ill equipped to deal with economic pressures that we are faced with.

The last three decades have exacerbated this problem. Western European and American leaders have largely been organizing economic policies around the goal of exposing just enough of us to market pressures to take advantage of globalization so as to have a pot of wealth to draw upon to subsidize middle class life.

The sovereign debt crisis suggests that this strategy cannot be sustained. Some think we can kick the can down the road by raising taxes on the rich, but eventually the crisis of government debt will require the middle class to pay down government debt, which can be done either by way of taxation, inflation, or default, all of which are ways of harvesting wealth from the middle class.

Our political leaders will find this very hard to do, because it amounts to breaking the post-War social contract. The purpose of social democracy is to protect the middle class, not to burden them. Indeed, the middle class in the West is already profoundly burdened by the economic pressures of globalization. Making them pay for past decades of protection may in fact destroy the middle class, or at least so fatally wound it as to fundamentally change the social character of Western democracies.

I am no more eager to face this future than are the (mostly) honorable but anxious and increasingly disarmed European and American politicians. But I’m afraid you and I must. For the paradoxical legacy of social democracy”its efforts to protect middle class life for the sake of social stability”is the root of our problems today.

R.R. Reno is Editor of First Things . He is the general editor of the Brazos Theological Commentary on the Bible and author of the volume on Genesis . His previous “On the Square” articles can be found here .

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